A journalist’s question during Mario Draghi’s ECB post-meeting press conference: “…There was a sharp reaction from financial markets to your Sintra speech. You must have looked at the Fed experience of 2013. Is there any concern in the Governing Council that the so-called tantrum or a similar reaction can happen in the eurozone when you start discussing changes in your stance?”

Draghi: “I won’t comment on market reactions, but let me give you the bottom line of our exchanges: basically, inflation is not where we want it to be, and where it should be. We are still confident that it will gradually get there, but it isn’t there yet, and that’s why the Governing Council reiterated the forward guidance, the asset purchase programme, the interest rates and all this package of monetary accommodation; and reiterated that the present very substantial monetary accommodation is still necessary. Let me read the introductory statement: ‘Therefore a very substantial degree of monetary accommodation is still needed for underlying inflation pressures to gradually build up and support headline inflation developments in the medium term.’

Draghi continued: “But let me just make clear one thing: after a long time, we are finally experiencing a robust recovery, where we only have to wait for wages and prices to move towards our objective. Now, the last thing that the Governing Council may want is actually an unwanted tightening of the financing conditions that either slows down this process or may even jeopardise it; and that’s why we retain the second bias, or let’s call it, reaction function. ‘If the outlook becomes less favourable or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, we stand ready to increase our asset purchase programme in terms of size and/or duration.’ And I think the Governing Council has given enough evidence that when flexibility is needed to achieve its objectives, it has been very able to find all that was needed. So that’s why we keep this bias.”

The above (astute) question referred to the Fed’s 2013 “taper tantrum” experience. While it received scant attention at the time, Bernanke’s - “The Fed will push back against a tightening of financial conditions” - response to incipient market instability proved a pivotal extension to his historic monetary experiment. In hindsight, this was the chairman’s vague introduction of a New Age Mandate: Central Banks Will Underpin Risk Embracement Throughout the Financial Markets. The Fed was prepared to employ aggressive stimulus measures in the event of self-reinforcing risk aversion and resulting marketplace liquidity issues. The Federal Reserve was signaling that it was ready to respond quickly to de-risking/de-leveraging dynamics – over time profoundly impacting risk-taking and securities and derivatives pricing throughout the markets.

No longer would the Federal Reserve confine market-supporting measures to crisis backdrops.

Apparently no reason not to upgrade the Fed put to 24/7. Their liquidity backstop was to ensure that selling momentum was not allowed to materialized. Sure enough, Bernanke’s New Mandate was a huge hit in the marketplace (S&P500 up more than 50% since 2013) and has been readily adopted by central bankers around the globe, certainly including Draghi’s ECB.

So few detractors. And typical of government “mandates,” once adopted they’re almost impossible to repeal.

“Will push back against a tightening of financial conditions” explains at least a few so-called “conundrums.” Why is the VIX (and risk premia more generally) so low? Why are sovereign yields remaining near historic lows despite the Fed raising rates and other central banks planning to do the same? How can equities ignore mounting political and geopolitical risks?

If central banks have become so keen to protect markets from risk aversion, why shouldn’t the cost of market “insurance” remain extraordinarily low. Why wouldn’t speculators gravitate to products fashioned to profit from providing myriad forms of market risk mitigation (hawking flood insurance during a drought)? And, importantly, as Bubble risks escalate, why would sovereign yields around the globe not discount the high probability that central banks will at some point be called upon to make good on their New Mandate – i.e. respond to faltering Bubbles with aggressive new QE programs with enormous quantities of bonds/securities to purchase?

I refer to Mario Draghi as “the world’s most important central banker.” He these days holds command over the markets’ preeminent liquidity backstop - in the most explicit terms. The Yellen Fed, raising rates and discussing balance sheet normalization, lacks the readiness enjoyed by Draghi. As such, the Fed now takes a backseat when it comes to the competitive advantage Draghi confers upon European securities markets.

In his press conference, Draghi refused to bite when questioned about the strong euro. This was taken as a lack of concern – and the euro surged. I expect Draghi is monitoring euro strength with increasing concern, though he prefers not to publicly challenge the currency market. I also assume he is skeptical of euro strength, expecting Fed policy normalization to be dollar positive.

Perhaps he doesn’t at this point fully appreciate the degree to which his market backstop underpins the euro, especially with a more dovish Yellen Fed and increasingly combustible Washington.

Italian 10-year yields sank 22bps this week to 2.07%. The Italian government borrowing for 10 years at about 2% is today’s poster child for wildly distorted markets and inflated securities values. Spanish yields dropped 20 bps this week to 1.45%, and Portuguese yields fell 24 bps to 2.91%. Now down 180 bps y-t-d, Greek 10-year yields ended the week at 5.22%. Draghi’s “whatever it takes” has worked wonders, especially for European periphery debt markets.

It’s worth mentioning that Germany’s DAX equities index sank 3.1% this week. France’s CAC 40 fell 2.3%, with major equities indices down 2.1% in Spain and 1.4% in Italy. European equities have been a hot, crowd-favorite trade – and this week took their turn for a bout of Crowded Trade Punishment. Draghi’s explicit liquidity backdrop provided a competitive advantage for the euro, as well as for European debt compared to European equities.

Draghi’s predecessor, Jean-Claude Trichet, had it right with his “I will not pre-commit to anything.” The Trichet ECB appreciated that pre-committing on policy would spur financial speculation and distortions. Trichet’s resolve on such an important issue must have been at least partially a reaction to Fed policymaking – and how Greenspan’s penchant for signaling the future course of policy cultivated destabilizing hedge fund and derivatives leveraged speculation. It’s ironic that Draghi not only discarded “will not pre-commit to anything,” he adopted the Greenspan and Bernanke approach but in a more audacious scheme.

There is no doubt that central bank liquidity backstops have promoted speculation, securities leveraging and derivatives market excess/distortions. I also believe they have been instrumental in bolstering passive/index investing at the expense of active managers. Who needs a manager when being attentive to risk only hurts relative performance? And the greater the risk associated with these Bubbles – in leveraged speculation, derivatives and passive trend-following – the more central bankers are compelled to stick with ultra-loose policies and liquidity backstops.

After all, who will be on the other side of the trade when all this unwinds? Who will buy when The Crowd moves to hedge/short bursting Bubbles? This is a huge problem. Central bankers have become trapped in policies that promote risk-taking, leveraging and hedging at this precarious late-stage of an historic Global Bubble. These days, central bankers cannot tolerate a “tightening of financial conditions,” and they will have a difficult time convincing speculative markets otherwise.

Speaking of credibility issues…

July 20 – Bloomberg: “China’s deleveraging campaign is taking on its toughest target yet: the public sector itself. While up to now policy makers have focused on a build-up of liabilities at smaller banks and big private-sector companies, President Xi Jinping has made clear that local government authorities and China’s behemoth state-owned enterprises too must restrain borrowing. Xi’s comments at a top financial-regulatory gathering last weekend were the latest signal of determination to head off any future destructive debt-bubble deflation. It’s perhaps the hardest leverage nut to crack, because Communist Party officials have for decades risen through the ranks by borrowing to fund growth -- whether at local authority levels or atop an SOE monopoly… ‘Policy makers will likely seize this rare opportunity to reduce leverage in the economy in a deeper, longer and more thorough campaign,’ said Helen Qiao, chief greater China economist at Bank of America Merrill Lynch in Hong Kong. ‘We will see more measures being rolled out in the second half of 2017 and 2018,’ she said… ‘Focusing on cutting excess leverage in real economy, instead of in the financial sector’ came as a surprise to some, said Zhu Haibin, chief China economist at JPMorgan… in Hong Kong. ‘Cutting leverage means the gap between credit growth and nominal GDP growth will narrow -- but that could have knock-on risks and drag on economic growth itself.’”

It’s helpful to remind ourselves that the Chinese have limited experience with runaway Credit Bubbles. This is their – borrowers, lenders, regulators and officials – first experience with a mortgage finance Bubble. They’ve never had to contend with overseeing the world’s biggest banks (involved in all kinds of things all over the place). They’ve never had small banks borrow Trillions in the inter-bank lending market. So-called “shadow banking” has never been such a powerful force – throughout the markets and real economy. The Chinese have limited experience with “repo” financing and the murky world of derivatives. They are new to corporate debt securities boom and bust cycles. They’ve never had to contemplate complex counter-party issues where the counter-parties have become massive global financial players.

For years now, I’ve chronicled Chinese policymakers taking a way too timid approach to managing mounting Credit Bubble excess. In the process, they brought new meaning to Greenspan’s “asymmetrical:” timid little baby steps against colossal financial and economic maladjustment, only to resort vehemently to the heavy hand of central control when Bubbles begin to falter.

Chinese officials appear more serious this time – though markets have over years become accustomed to not taking “tightening” measures seriously. Beijing’s policy approach has been incongruous. They’ve employed various measures to tighten mortgage lending. More recently, officials have attempted to rein in “shadow” lending and some of the more conspicuous areas of financial excess (i.e. insurance and global M&A). At the same time, from a macro level Beijing has promoted the ongoing rapid money and Credit growth necessary to meet official GDP targets. To be sure, efforts to restrain Bubbles and systemic risk while spurring massive monetary inflation were never going to end successfully.

Repeating the above quote from BofA China economist Helen Qiao: “Policy makers will likely seize this rare opportunity to reduce leverage in the economy in a deeper, longer and more thorough campaign.” And from JPMorgan economist Zhu Haibin: “Focusing on cutting excess leverage in real economy, instead of in the financial sector came as a surprise to some…” Well, at this point, Chinese officials are confronting a harsh reality: there are few alternatives left. Systemic risk has only mushroomed in spite of myriad tightening measures and policy approaches.

China is on course for $3.5 TN of Credit growth this year – with a trajectory that is as precarious as it is unsustainable. If they do in fact take the necessary more systemic approach to containing Credit excess, it’ll be a new ballgame in China and globally. Yet at this point officials are not taken seriously. That officials did not act with more resolve in previous tightening attempts creates the dilemma that only harsh measures will now suffice. Global markets met President Xi and other’s pronouncements this week with a giant yawn. The expectation is that dramatic measures will not be imposed prior this autumn’s Communist Party National Conference.

I’m reminded of the Rick Santelli central banker refrain, “What are you afraid of?” Yellen and Draghi seemingly remain deeply concerned by latent market fragilities. How else can one explain their dovishness in the face of record securities prices and global economic resilience. A headline caught my attention Thursday: “Bonds: ECB Gives ‘Green Light' to Summer Carry Trades, BofA says.” It’s been another huge mistake to goose the markets this summer with major challenges unfolding this fall – waning central bank stimulus, Credit tightening in China and who knows what in Washington and with global geopolitics.

Within a handful of weeks the US economy will in all likelihood have delivered both the longest and the weakest economic upswing in the entire postwar period. Unemployment has dropped to levels typically consistent with accelerating wages, mounting inflationary pressures and rapidly rising interest rates. Yet, even though the US Federal Reserve has nudged rates up a touch, there are few obvious “end-of-cycle” pressures. Growth remains weak, productivity gains continue to be lacklustre and wage pressures are incredibly muted.The forecasting community does not quite know what to do with all this. Most forecasters expect US growth to accelerate, yet none expects unemployment to drop much further from its current 4.4 per cent rate. Implicitly, therefore, forecasters appear to be assuming that productivity growth will suddenly accelerate, even though there is no evidence whatsoever to support this. That they are doing so reflects their belief that US economic growth must eventually return to “normal”, alongside their strong conviction that unemployment is already close to, or possibly below, its “natural” rate. It is a form of cognitive dissonance.There are, however, other possibilities. One is simply that the unemployment rate falls a lot further without significant upward pressure on wages. This would be a continuation of the “long, not strong” upswing seen to date. Technology may be reshaping the relationship between employment, wages and investment. Most obviously, the “gig economy” allows companies to hire workers by the task or by the hour, not just the week, month or year. This makes labour supply a lot more “stretchy” from the employer’s point of view. As a result, companies can expand their operations without having to make the risky long-term investments that would, in other circumstances, lead to faster productivity growth. The stretchiness of labour supply, in turn, implies that even the least marginally productive worker may be hired on occasion. The so-called “natural” rate of unemployment is thus able to drop to much lower levels than seen in the recent past. In effect, the US becomes a high employment, low wage, low investment and low productivity economy.Another possibility is simply that the US economic upswing will come to an end much sooner than the vast majority of economists expect. Having already seen 92 months of falling unemployment, history suggests it is not unreasonable to think that the next downswing may be just around the corner. No one is forecasting it, but then again very few successfully spotted either the 2000 or the 2008 downswings until they were visible in their rear-view mirrors. So what might cause a downswing? There are three potential triggers. First, based on the Shiller historic price/earnings ratio, the US stock market is more expensive than at any other point in history apart from 1929 and the run-up to the tech bubble in 2000. Should the gap between financial hope and economic reality have to close suddenly, the risk of economic dislocation could increase significantly.Second, although it has not happened yet, it may just be that wage growth will suddenly accelerate (in spite of the gig economy) thanks to a tightening labour market, triggering a more aggressive response from the Fed than anyone currently thinks is plausible. Third, we live in strange times. The EU and Japan may be on the verge of signing a trade deal but, thanks to Washington’s newly isolationist attitude, it is not impossible to imagine that business confidence is ultimately tripped up by the return of protectionism in some form. Whichever possibility becomes reality — and they are not mutually exclusive — they are all more plausible than the current consensus that, in effect, chooses to ignore much of the accumulated evidence of recent years. Forecasters have persistently overestimated both the growth rate of the US economy and its unemployment rate. They have done so because they have had a fixed view about productivity performance that, in the event, has proved to be hopelessly optimistic. In a world in which growth is structurally a lot lower than it once was, it is time to believe the unbelievable. The hitherto believable, after all, no longer makes sense.The writer is the author of ‘Grave New World’ (Yale) and HSBC’s senior economic adviser

The violence that erupted at the G-20 summit last week has raised significant questions as to whether protecting world leaders was prioritized over the safety of the people of Hamburg. Police records from the weekend reveal the full scale of the chaos. By SPIEGEL Staff After the last state guest had left and the smoke from burning barricades had dissipated, Hamburg Mayor Olaf Scholz decided on the line of defense he would take and headed into the studio of Anne Will, Germany's best-known television talk show host, last Sunday evening. During the broadcast, Scholz vehemently rejected accusations that the police in Hamburg had only been interested in protecting Putin, Trump & Co. -- and not Hamburg residents. "That wasn't the priority," Scholz told viewers.

On Monday, he told German tabloid Bild: "The accusation is absurd."

In his statement delivered to the Hamburg municipal government on Wednesday, Scholz, of the center-left Social Democratic Party (SPD), insisted a third time that the measures taken by police were aimed "equally at protecting the summit and at providing security to residents." Really?The Hamburg police's operation plan is 40 pages long and dated June 9, exactly four weeks before the G-20 summit held last weekend in the German port city. The cover sheet of the confidential document (marked: "for official use only") bears the insignia of the Hamburg police department as well as the name of the special operation: "Michel." Under point 3.2 ("Guidelines"), the mission's objective is clearly formulated: "The protection and security of the guests has the highest priority."The blame game began in Hamburg almost as soon as the three chaotic G-20 days came to an end, during which hundreds of people were injured, countless cars set on fire and several shops looted. And that is just the physical damage. Many citizens came away with the feeling that their security is more fragile than they thought -- and Germany itself emerged with an image problem.It is important to identify who is responsible for the G-20 debacle for three reasons. First and foremost, the people of Hamburg need to know what went wrong so that they can regain confidence in their own security and that of their city. Second, the brutal images from the summit changed the ongoing election campaign and, as political leaders offer competing interpretations of what happened, reliable facts are crucial. And finally, people across Germany want answers to the question as to how the state intends to protect itself from its enemies.A team of DER SPIEGEL reporters has examined confidential operation records and the operation plan. Our journalists spoke with police officers, demonstrators and the lawyers of those who have been charged with offenses. We also interviewed public security experts and politicians in Hamburg and on the federal level.

A Misguided Strategy

All of our reporting ultimately led to Olaf Scholz. Under his responsibility, the Hamburg police ignored warnings and developed a misguidedly repressive strategy for dealing with the protests, say police chiefs from other German states. During the summit, they misinterpreted the potential dangers they were facing and were unable to protect residents, despite having assembled 20,000 police officers from across the country. And after the summit, Scholz misled the people by repeating several times that the protection of state guests and that of the population at large had equal priority.Instead of admitting his mistakes, the mayor condemned the violence, called for harsh penalties and -- to his credit -- apologized to the people of Hamburg. But he didn't present any sort of strategy for the future. He has no explanation for the political anger vented on the streets of his city and no idea how Hamburg can finally put an end to its years of conflict with the left-wing radicals of the autonomous movement -- a conflict which has now escalated.As a result, Scholz has become a problem for his political party, the SPD. With just over two months to go before Germans head to the polls to elect a new government, the summit chaos has unexpectedly become a problem for the SPD, whose campaign was already struggling to gain traction. Now, the party's chances for catching up to Chancellor Angela Merkel's conservatives are lower than ever.Before the G-20 summit, the SPD's greatest concern was that Merkel could use the images of herself with the most powerful leaders in the world to boost her campaign. But the result was worse than they imagined. Following the riots, the SPD is on the defensive while the chancellor has emerged unscathed.Much of that has to do with Scholz. The Hamburg mayor is a central figure in the SPD leadership, along with chancellor candidate Martin Schulz and Foreign Minister Sigmar Gabriel, who handed over the party reins to Schulz in January. Scholz had been seen as a possible replacement as party head should the SPD lose in the Sept. 24 elections. Furthermore, the SPD has been hoping that domestic security would not become an issue in this campaign. Traditionally, Merkel's Christian Democrats are seen as having the upper hand on security issues and Scholz, had everything gone well in Hamburg, was to have neutralized that advantage. That hope, however, has not panned out.As such, Martin Schulz finds himself in a difficult position. He had hoped to spend the coming weeks getting his campaign back on track. Instead, he has been forced to face questions regarding Scholz's future. Plus, Schulz has again been confronted with accusations that he is allowing Gabriel to steal the show. The foreign minister recently sought to put the SPD on a more aggressive footing by launching forceful attacks on the chancellor, accusing German conservatives of a "previously unseen degree of dishonesty."But Schulz is also facing problems on a strategic level. The ongoing debate in Germany over left-wing violence has little to do with the SPD directly. But the as yet unclarified stance of parts of the Left Party and Green Party to the violence-prone autonomous scene makes a postelection coalition joining the SPD with those parties much less likely. The SPD's already narrow path to power is vanishing.

Increasing Uneasiness

Still, the state as a whole hasn't been making a particularly positive impression lately either, and neither has the government. On four occasions in the last two years, German citizens have stood by as the state has lost control. It began with the refugee crisis, when hundreds of thousands of people entered the country without papers. Then came the widespread sexual assaults in Cologne on new year's eve at the end of 2015. That was followed by the terror attack on the Christmas market in Berlin last December. And now the G-20 chaos in Hamburg.There are different explanations for each of these events. But all of them have increased uneasiness among the population. The impression has developed that the state -- as in the case of the huge number of refugee arrivals -- is overwhelmed or is unable to provide sufficient protection to its citizens.Both politicians and society must learn from these recent events. It is often the case that political leaders -- once the chaos has ended, the violence has died down and the debris has been cleaned up -- call for a stronger state, more police, stricter laws and a more stringent approach to criminals and extremists of all types.A strong state must confront its enemies with determination. But it also needs other, less combative instruments. It must focus on prevention, reach out to different groups in society and provide assistance where needed. And it must be confident enough to take a step back when the situation calls for it. It is a lesson that the city of Berlin has understood: The German capital has successfully managed to deescalate the violent Labor Day riots that used to take place every year on May 1.The police in Hamburg, says André Schulz, head of the Association of German Criminal Investigators (BDK), have emerged from the G-20 operation looking like "idiots in the eyes of the nation." But it's not the officers who are to blame, he says. The problem "is that police and political leaders have been unable to find a coherent strategy for confronting recent violence."One month before the G-20 summit, Hamburg Police Superintendent Hartmut Dudde signed the operation plan that his officers were to follow. The document provided the regulatory framework for the largest police operation in Germany's postwar history. More than 20,000 police officers were to be called in to protect the world's most powerful heads of state and government during the July 6-8 summit on the banks of the Elbe River in Hamburg.

'Hurricane' and 'Lightning'

Dudde knew that it would be a challenging operation. He was faced with having to prevent assassination attempts on summit participants, terror attacks and eruptions of violence from among the demonstrators. He had no illusions: There would be massive protests that "would also include violent excesses," as it says in the operation plan. "Violent offenses targeting police officers" should be "expected."The recipe the Hamburg police chose to deal with this threat was force. Disruptions of the summit, and of the participants during their travels through the city, were to be prevented as quickly as possible, Dudde ordered. When it came to confronting demonstrators and instigators, the operation plan indicated that the bar for stepping in should be low. The worst possible scenarios were given code names, with "Hurricane" referring to a terror attack, "Lightning" to an assassination and "Confection" to the discovery of a bomb. But that's not all, there was also plenty of room in the operation plan for less important issues. Police officers were not to use their private mobile phones and they were banned from uploading images from the weekend to the internet. They were also told to maintain "tolerant, open, communicative and friendly behavior.""The police officers deployed will stand at the center of global attention," Dudde wrote. "By maintaining an immaculate external appearance and proper demeanor, every officer will make an important contribution to overall success." One outcome of the weekend was to be nice images that could be used in the election campaign, and it was Dudde's task to provide them.Shortly before the beginning of the summit, the police superintendent ordered his subordinates to take a tough line. "A water cannon has no reverse gear," he said in a meeting. "Don't report when a street is blocked. Report when it has been cleared." Officers quickly realized, if they hadn't already, that there was no strategy for de-escalation. Dudde was seeking a showdown with the demonstrators.

The Hamburg police's operation record and the confidential situation reports produced by the Federal Interior Ministry from July 7-10 are a total of several dozen pages long. The sober language therein stands in direct contradiction to the attempts at justification made by police leaders and politicians following the summit.In press conferences, security officials claimed they were taken completely by surprise by the extent of the violence. The Federal Interior Ministry, by contrast, wrote: "The forecasts pertaining to the development of the protests against the G-20 summit developed by (domestic intelligence officials) proved to be accurate."

A Desperate Situation in the Schanzenviertel

Furthermore, whereas Hamburg Police Chief Ralf Martin Meyer spoke of how difficult it is when "perpetrators without a connection to the summit" pursue "small group tactics," an Interior Ministry paper noted: "The mobilization method and modus operandi of militant structures (small group tactics) in addition to the violence perpetrated were per se not new." They had already been followed "in disparate campaigns and operations" carried out by the left-wing extremist spectrum.Did the Hamburg police underestimate the potential for violence? Already on the eve of the summit, on Thursday, July 6, all signs were pointing toward confrontation. At the "Welcome to Hell" demonstration, a sea of white police helmets glittered in Hafenstrasse, the street where the march was to begin. Four water cannons were in position under a bridge facing 12,000 demonstrators, of whom around 1,000 had masked their faces in black. "Hurray! This world is ending!" read one poster.Before long, the first bottle was thrown at the police. Officers charged at the instigators from the side and they fought back with wooden planks. Then, the water cannons sprayed the demonstrators off the street. "Dudde wanted to provoke the Black Bloc so that there would be cause for intervention," one officer said, referring to the black-clad members of the autonomous movement. The atmosphere for the coming days had been established.The next morning, the day the summit began, as least one thing went according to plan: the journeys of the summit participants to the meeting site. "The convoy of Chancellor Merkel left at 9:05 a.m. in the direction of the exhibition center," the police reported. The Russian president's convoy set off at 9:12 a.m. and that of the American president's at 10:20 a.m.But everywhere else, chaos reigned, as had already been the case for hours. Every few minutes, the police reported disruptive actions taken by members of the autonomous movement across the city.

At 6:33 a.m., the operation records note that police officers near the Volkspark Stadium were being "intensely" pelted by objects thrown by people wearing masks. At 7:13, police on Schützenstrasse went after a group of "violence-prone instigators" with truncheons and pepper spray. At 7:27 a.m., 1,000 people, around 300 of them dressed all in black, appeared at the Landungsbrücken, the docks in central Hamburg from which tourist boats depart for harbor tours.

Send Us Everything You Have

And the list kept growing. Sit-ins blocking a street, burning cars, stones thrown through the window of a municipal building. It was a game of cat-and-mouse that the police couldn't win. Those in charge decided that their only option was to call for reinforcements. At 7:53 a.m., they called for backup from Lübeck, located just northeast of Hamburg, and six minutes later, they ordered in help from the federal reserve police force near Bonn, which flew in by plane. At 8:12, mission headquarters sent out a call for help to the federal government and to all state governments: Please send us everything you have.At this point, the summit hadn't even begun yet. But the leftist instigators had already ruthlessly run the police into the ground. The officers had been on their feet for 20 hours and during the day, many of them collapsed from dehydration and exhaustion.By noon, the autonomists had pushed the police so far that they were no longer able to completely fulfill their most important task: protecting the summit and its participants. Many of the autonomists' attacks against delegation vehicles at various locations were successful. "No high-ranking member" in the vehicle, relieved officers reported after each such attack. At 11:45, the side window of a vehicle belonging to the U.S. delegation was bashed in. Given the widespread violence, police leaders decided that Angela Merkel and her guests should go straight to the Elbphilharmonie concert hall from the convention center instead of stopping by their hotels first. Only one leader, Turkish President Recep Tayyip Erdogan, didn't cooperate, choosing to skip the concert. It wasn't the first time that he had caused headaches for the police. On one occasion, his convoy didn't wait for a police escort and simply drove off. The result was chaos as the escort sped after the convoy to chase it down.The weekend's primary eruption of violence, the showdown in the Schanzenviertel neighborhood, began on Friday evening just as the concert in the Elbphilharmonie got started. The first barricade was set on fire at 8:47 p.m. -- and it may be that this was the last opportunity the police had to gain the upper hand on the chaos. "There was a certain period when the Schanze could still have been flooded with police," one officer said. "But our people were tied up all across the city."

Rocks, Paving Stones and Metal Rods

Police had planted several plainclothes informants among the ranks of the left-wing autonomists, referred to by the police as "citizen observers," and operation command began receiving reports of planned ambushes. At 9:31 p.m., the informants reported that the autonomists were preparing for a fight. "Serious injuries should be expected should the police advance."This was the moment when the police turned over the Schanzenviertel to the mob -- there would be virtually no police presence in the quarter for the few hours that ensued, a time during which much of the looting and property damage took place. One senior police officer wrote in an internal document that intervention would have meant being pelted and beaten with "rocks, paving stones, metal rods and incendiary devices." It was now up to Bernd Bürger, 40, head of a unit of crack riot police based in the Bavarian town of Dachau, to decide whether to send his charges into the inferno. Bürger has been involved in several protests during his career, including violent demonstrations at the nuclear waste storage site in Gorleben and at the G-8 summit in Heiligendamm near Rostock in 2007. His unit is trained to apprehend the ringleaders of violent protests.But he had never, Bürger said, been in a position where his people faced a serious threat to their lives. And he and his commanding officers had never been faced with the difficult decision of rejecting an operational order for this reason. That, though, was the position in which he found himself at 10 p.m. on Friday, July 7.The 130 riot police from Dachau had already been on their feet for days and had only slept for an hour in their hotel the previous night. They were at Millerntorplatz square, in the heart of St. Pauli -- Bürger had just deflected a flying bottle with his arm -- when the order came: clear Schulterblatt, the main street in the Schanzenviertel.

'A Life-Threatening Situation'

They were about 150 meters from Schulterblatt, the end of which was flanked by a building completely covered in scaffolding. There were several people on the scaffolding. A helicopter circled overhead and Bürger was told via radio that autonomists had carried paving stones up to the roof of the building and that they might be planning to try to kill police officers. Hamburg domestic intelligence officials had provided similar information, Hamburg police would later confirm. It was around 10 p.m. when Bürger discussed the situation with police commanders from other German states. "We quickly agreed that a further advance would carry a serious risk to the lives of our colleagues." This concern was reported to police leadership.Another senior officer added: "These extremely well-trained people, they've spent a long time preparing for a moment like this. When they say, 'We're not going in there,' then it means something. It was simply a life-threatening situation."Police Superintendent Dudde wasn't thrilled at first. He urged the forces to go into Schulterblatt -- to protect local residents, as Hamburg Police Chief Meyer would later say. But also because the flames in the street were threatening to spread to the surrounding apartment buildings. The discussion continued for some time until Dudde finally ordered two large units of special forces to get the people off the rooftops.

A Lawless Zone for Two Hours

Yet even though there were lots of special task force (SEK) police in the city at the time, none were initially available. The elite police were guarding the Elbphilharmonie and the world leaders gathered there. The result was a considerable delay in their deployment, the police president would later say. It remains an open question as to why none of the SEK units had been assigned specifically to the Schanze, a district well-known to police as a potential trouble spot for far-left activity.For more than two hours, there was no police presence whatsoever in the Schanzenviertel that night. After the concert at the Elbphilharmonie, Mayor Olaf Schulz called the police command control center in Hamburg's Winterhude district. All he could do was watch powerlessly as parts of his city sank into chaos.At 11:40 p.m., the clearing action finally began. Bürger's unit was present as the police advanced on Schulterblatt; he ran behind a water cannon. Stones struck his helmet. One of his men stumbled into a manhole because someone had taken the cover off. "All of Hamburg hates the police," masked protesters would later chant. The situation wouldn't quiet down until 2 a.m.. An official at Germany's Federal Interior Ministry would later sum up the riots by saying: "The events happened just as expected."Ralf Martin Meyer, the Hamburg police chief, rejects allegations that his forces placed a priority on protecting guests of the G-20 summit rather than local residents. "I consider the question of priority to be an inadmissible escalation" he says. "Of course, the safety of official state guests against, for example, terrorist threats had the highest priority. But that doesn't mean that protecting citizens was less important. The police sought in parallel to ensure the safety of the people to the same extent."That's also how Mayor Scholz sees it. Three elements had the highest priority, he says: protecting the people, ensuring the safety of summit participants and ensuring peaceful protests. "It was never about attributing greater importance to protecting summit participants than protecting the people," a spokesman told DER SPIEGEL. "The discrepancy is clearly a figment of the imagination," he said. He added that the mayor had no knowledge of the operation plan.Still, there will be consequences. Police Chief Meyer intends to rethink his deployment strategy. But he says the guerilla tactics used by the autonomous movement present a problem that is almost impossible for the police to solve. "We have to consider how were are going to deal with these criminals in the future," he says.

Thirty Hours at the Detention Center

As Marie Beier, whose name has been changed to protect her identity, walked through Hamburg that Friday, she had no idea that her day would end in a cell, without a bed or a toilet. Beier had just graduated from high school with good grades. She had also worked as a volunteer at a refugee hostel in the state of North Rhine-Westphalia. She had wanted to protest against the G-20 in Hamburg, but she didn't get far. The 19-year-old was detained together with other activists on the street. The police brought her to the collection point for detainees in Neuland. The charge: a serious disturbance of the peace.Beier exercised her constitutional right to remain silent, but the responsible public prosecutor used that against her and ordered her arrest. Apparently, the prosecutor views anyone who exercises the right to remain silent with suspicion.What Beier experienced in the provisional jail sounds disturbing. Her lawyer Lino Peters says it was almost 18 hours before he was allowed to speak to his client and it took that much longer until her bail hearing. In the more than 30 hours at the detention center, Beier's lawyer says scenes played out that are hard to imagine. Marie Beier has serious vision impairment and she can only see shapes without glasses. Despite her complaints, her glasses were kept from her throughout her detention.

Police also took their time when she asked for a tampon. Officials allegedly mocked her and other women: "You're destroying our city. Protesters aren't allowed to have their periods."Now Beier's mother is sitting completely disillusioned in a lawyer's office in Hamburg. She describes her daughter as being peaceful, helpful and cosmopolitan. Marie has no previous criminal record -- at worst, her mother says, she can be a bit careless in unfamiliar situations. What she has learned about her daughter's treatment in detention angers her. "It's arbitrary and inexplicable." In a telephone call, her daughter asked, "Mom, is our legal system working?" The detention judge said the young woman faces two years in jail, citing "general prevention" as the reason, according to the arrest warrant. Beier was only released on Wednesday afternoon. Her lawyer picked her up. "I've never before seen humiliation and caprice on the scale shown during the G-20 week," he says.

Brutal Tactics

Many other young people who wanted to protest in Hamburg experienced similar treatment. The brutal tactics used by the police can be seen in numerous internet videos. They show people who are already on the ground getting kicked by officers in combat gear and beat with Billy clubs. Police break up sit-ins using tear gas. As of Thursday, 35 investigations had been opened into police officers -- in 27 cases for causing injury while on duty.Public prosecutors have also issued arrest warrants for 51 activists -- largely for disturbing the peace, but also for committing grievous bodily harm or damaging property. Detainees report that they were forced to strip completely naked and that they had to squat and undergo anal cavity searches.Despite the summit debacle, Mayor Scholz is still in office. He doesn't have any opponents in his party who could be of any danger to him. Already last weekend, the left wing of the Social Democratic Party in Hamburg agreed that they would continue to defend the mayor despite concerns over his comments and handling of the situation.The head of the SPD's state chapter is also backing the mayor, as is the party group in the Hamburg city-state's parliament. SPD leaders say it was right to hold the G-20 summit in Hamburg. They're blaming the debacle on the Left Party, which they say didn't speak out clearly enough against violence. Some members of parliament have suggested the Scholz ought to be proactive in speaking to residents of the Schanzenviertel neighborhood, but he has thus far refused to do so.Scholz also has no reason to fear an investigation by the city-state parliament. The SPD and the Greens have together agreed upon a harmless special committee. Indeed, the Social Democrats' junior coalition partner has been docile.

Merkel's Reserve

The only critical words are coming out of Berlin. "The question must be addressed as to who is responsible for the fact that there were no police in Schanzenviertel for two hours," says Jürgen Tritten, a prominent member of the Green Party. He says a decision must have been made that something was more important than the residents of Schanzenviertel. "We need to talk about that." After the events of last week, Trittin says, no mayor is going to want to host a summit again. "No one wants to end up like Olaf Scholz -- as the chancellor's human shield and aspiring fall guy," he says.But members of the Green Party in Hamburg have shied away from breaking with Scholz. Nor does the Hamburg mayor have to worry about attacks from Merkel's conservatives in Berlin. The debate is playing to the advantage of the conservatives as it is. In a meeting of the CDU's national committee, Merkel ordered her party not to attack Scholz.The reserve demonstrated by the chancellor has two advantages for her. For one, it comes across as statesman-like and nonpartisan for her to stand at the mayor's side. For another, though, it also helps her prevent a debate over what share of the blame should be attributed to Merkel. She, after all, is the person who first called Scholz to propose Hamburg as the site of the summit. Jörg Radek, the deputy national chair of the police union GDP, hasn't forgotten."The risks and the side effects of such a summit were known from previous such meetings. But for political marketing reasons, these were ignored," he says. "Hamburg was supposed to serve as a stage for the big and powerful. But it was ultimately others who created the images. It has harmed the police and damaged the PR of the Chancellery."Rather than attacking Scholz, the conservatives instead want to go after the SPD on another issue. "We must demand that left-wing parties distance themselves from the perpetrators of violence to the same degree we do from violence on the far-right," German Interior Minister Thomas de Maizière said during the meeting of the CDU's executive committee. The tone was set. The sharpest words came from Jens Spahn, a rising member of the CDU and a senior official in the Finance Ministry. "Left-wing extremism has been played down for years in Germany," he said. "The Left Party and parts of the SPD and Greens have turned a blind eye to it."No one within the conservatives is seriously accusing the Social Democrats of having an ambiguous relationship to violence. But that isn't as clear when it comes to the fringes of the Greens or the Left Party. Given that many SPD politicians are still dreaming of going into a coalition government with the Greens and the Left Party after the next election, that is indeed a problem for the Social Democrats. The result is that the SPD has had trouble pulling itself out of the defensive following the riots. The first person who attempted to steer the debate toward Merkel was Foreign Minister Gabriel, who blustered that the summit had been a "total failure." In an interview, Gabriel also said that anyone calling for Mayor Scholz to step down "also needed to call for Merkel's resignation."

'Absurd and Inappropriate'

But contrary to Gabriel's hopes, Merkel hasn't taken the bait. Other conservatives, though, have been less reserved. Bavarian Finance Minister Markus Söder, a member of the Christian Social Union, the Bavarian sister party of Merkel's CDU, described Gabriel's attack as "absurd and inappropriate. Rather than addressing the left-wing criminals, attacks are being launched at the chancellor." Söder then ridiculed the SPD, saying the party was getting nervous about its standing in the polls two months before the national election. "There's no other way of explaining the foreign minister's comments."Söder has a point. More than anything, Gabriel's comments illustrate the extent to which Martin Schulz is struggling to steer has campaign in the right direction.Following the riots, Schulz initially warned against using Hamburg for petty "partisan skirmishing." He offered praise for Merkel's chief of staff, Peter Altmaier, who had defended Mayor Scholz from attacks by the CDU in Hamburg. But it soon became apparent that this tactic wasn't working for the SPD. On Monday night, Schulz sharpened his tone. He said it was insulting for a party that had stood in the way of Hitler, as the SPD did, to be accused of having an unclear relationship with extremism. "We don't need any lectures on that," the chancellor candidate groused.Following Gabriel's resignation as party chair in January, Schulz opted not to become a minister in the coalition government because he wanted to be independent enough to fire away at Merkel. Now he's realizing that it's not so easy. His people say that he's saving the right attacks for the final stretch of the campaign. But it may already be too late. The days of rioting in Hamburg have already dragged the SPD further down in the polls. If the party fares significantly worse than the 25.7 percent it received in the last federal election in 2012, Schulz will likely have to step down as SPD chairman. Should that happen, it's not likely that Olaf Scholz will be in the running to succeed him.

- Let's talk about what happened on Thursday.- One market was blinded by obfuscation, but another market saw right through the charade.- Allow me to synthesize everything for you.

Well, Thursday was fun.

The clear and present danger was Mario Draghi, who inadvertently set off a mini-tantrum in DM rates late last month with what he probably thought were innocent enough comments about the purportedly transitory nature of weak inflation.

Or maybe he didn't think the comments were innocent. Because the dramatic reaction in German yields didn't stop him (and his counterparts) from ratcheting up the hawkish rhetoric in the days that followed.

Fast forward three weeks and the stage was set for the ECB statement and subsequent Draghi presser to put still more upward pressure on yields, a scenario which, if recent shifts in correlations are any guide, would have been bad news for risk assets.

So what happened on Thursday morning? First of all, the ECB statement was dovish.

Specifically, it kept this sentence unchanged:

The Governing Council stands ready to increase the programme in terms of size and/or duration.

Folks were looking for the removal of the word "size" and when it stuck around, the knee-jerk in bund yields and the euro (FXE) telegraphed a dovish interpretation from markets.

Then, 45 minutes later, Draghi's prepared remarks at the press conference sent the single currency flying:

.

Were there hawkish bits you could cherry-pick? Yes. Were his comments overtly hawkish? Not at all.

So what you see in that chart effectively represents FX traders simply saying "we don't believe you anymore."

See the ECB is bumping up against some technical constraints with its dual QE programs, notably in PSPP. I won't put you to sleep with the details, but suffice to say it has to start scaling it back.

But while the FX market saw right through the dovish smoke screen, Draghi's presser was a clinic in obfuscation and doublespeak. And that saved us from another rates tantrum. Have a look at how hard a time the rates market had in figuring out exactly how to read Draghi:

.

Simply put: you should trust the FX market's interpretation on this one. The bottom line is that these policies have reached the end of the road. There's not much else central banks can do.

Of course, someone forgot to tell the BoJ that. Predictably, Kuroda doubled, tripled, and quadrupled down on the reality denial after the BoJ decision on Thursday (you should read his comments).

Japan is nowhere near its inflation target and honestly, it is never going to hit it. Have a look at how far behind it is versus the ECB and the Fed:

(Bloomberg)

Despite the fact that what it is doing is clearly not working, Kuroda is going to keep at it.

On that score, I wanted to bring something to your attention. There are still a few readers on this platform who are in the habit of pretending as though central banks aren't behind stock market returns. That's an especially strange thing to say with regard to the BoJ, because it quite literally owns 75% of the entire Japanese equity ETF market.

But just in case this point needed to be reinforced, here's what Akira Kiyota, the head of Japan’s stock exchange, told Bloomberg in an interview published this week:

[The BoJ's ETF buying] is not good in the long run. If you keep buying 6 trillion yen a year, that means constant distortion.

Yes, "constant distortion."

And in what is perhaps the most poignant example yet of central bank market dominance, consider that within 36 months, the BoJ will own the entire free-float of Fast Retailing (the operator of Uniqlo stores) which incidentally is the most heavily weighted company on the Nikkei:

(Bloomberg)

I would gently ask critics of the central bank "conspiracy theory" to riddle me this: "Does buying the entire free-float of a company count as 'cornering the market'"? Or do we still need "more evidence?"

You can see why the FX market is starting to ignore what these officials say - it simply isn't possible for this to continue in perpetuity.

Meanwhile, global equity (SPY) and bond markets continue to soar to new record highs and volatility continues to make new record lows. Look at this:

(Bloomberg)

See that white line? That's global stocks.

Ok, so that white line is the same as the light blue line in this chart:

(Citi)

The dark blue line is rolling central bank asset purchases and that giant leap off a cliff you see in the "forecast" section (shaded in red) is what's going to happen starting later this year.

On July, 5, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Brazil.

Brazil’s deep recession appears close to an end. The recession, triggered by large macroeconomic imbalances and a loss of confidence, was exacerbated by declining terms of trade, tight financing conditions, and a political crisis. Buoyed by congressional and market support, the new government has pursued an ambitious reform agenda. A constitutional amendment that caps growth in federal noninterest spending in real terms has been passed and progress has been made on the discussion of social security and other structural reforms. Recent indicators suggest Brazil’s economy is close to a turning point. While the end of the recession appears to be in sight, a recent rise in political uncertainty has cast a shadow over the outlook. The government’s ability to deliver on social security reform, a necessary step toward securing fiscal sustainability, has become more uncertain—and, with national elections scheduled for 2018, the window for legislative action is closing. Fund staff expect a subdued recovery. Growth is projected to be 0.3 percent in 2017 and 1.3 percent in 2018, moving towards 2 percent in the medium term. Inflation is projected to undershoot its central target of 4.5 percent in 2017 and 2018. The forecast assumes that a sufficiently strong set of measures—most notably social security reform—are put in place to ensure fiscal sustainability. Political instability and spillovers from the corruption investigation are major sources of risk that could threaten the reform agenda and the recovery. The main policy risk is that the social security reform is severely diluted or delayed to the next government, prompting adverse market reaction in the near term and necessitating additional fiscal measures over time. The main external risks are a faster than expected tightening of global financial conditions and, with a lower likelihood, a significant slowdown in China. Disinflation has continued, providing more room for monetary easing. After almost 2 years of being above the ceiling of the central bank’s tolerance range of 6.5 percent, inflation has declined rapidly over the past year. The impact of large increases in regulated prices in 2015 has dissipated, while a widening output gap, an appreciating exchange rate, declining inflation expectations, and a favorable shock to food prices have combined to speed disinflation since late 2016. The central bank began an easing cycle in September 2016, bringing the monetary policy rate down by a cumulative 400 bps to 10.25 percent as of June 2017. The National Monetary Council has announced a gradual reduction in the inflation target to 4.25 percent in 2019 and 4.0 in 2020, which will bring Brazil closer into line with other inflation targeting countries. The recession has been a main driver of external adjustment. Reflecting weak investment and improving terms of trade, the current account deficit narrowed to 1.3 percent of GDP in 2016 (from 3.3 percent of GDP in 2015). On average in 2016, the external position was broadly consistent with medium-term fundamentals and desirable policies. Brazil has continued to attract sizeable capital inflows. The flexible exchange rate has been an important shock absorber. The central bank reduced the rollover rate of maturing FX swaps and auctioned reverse FX swaps, significantly reducing its net forward position to 1.4 percent of GDP from over 5 percent of GDP at end-2015. International reserves have remained a source of strength, standing at US$365 billion at end-2016, above the IMF’s adequacy metric and other standard indicators. The health of the banking sector has improved. Despite the recession, profits before taxes have surged due to high interest margins and lower funding costs. To limit increases in non-performing loans, banks have continued renegotiating the terms of loans and writing off delinquent loans. Capital ratios have increased on the back of a decline in private banks’ risk-weighted assets and higher unrealized gains on fixed income securities. Liquidity has also improved as withdrawals of saving deposits stopped and banks’ holdings of liquid assets increased. Overall external funding exposure and net open positions have remained low. Fiscal outcomes have been disappointing and public debt ratios have risen sharply. Non-financial public sector debt rose from 72.5 percent of GDP to 78.3 percent between 2015 and 2016, with primary balances of -1.9 and -2.5 percent of GDP, and overall balances of -10.3 and -9.1 percent of GDP in those two years. The deficits in the primary balance have been largely the result of trend increases in mandatory spending and a sharp cyclical revenue downturn, while high borrowing costs and the contraction in output have delivered adverse debt dynamics. The government aims to restore fiscal sustainability by gradually bringing primary balances toward surplus territory, with the support of the constitutional expenditure ceiling and social security reform. For 2017, the authorities aim to bring the primary deficit to ‑2.1 percent of GDP. They have introduced adjustment measures of 0.9 percent of GDP, including cuts in discretionary spending of 2/3 percent of GDP and a partial roll-back of payroll tax exemptions. Executive Board Assessment [2] Executive Directors welcomed that the Brazilian economy is showing signs of recovery following years of deep recession. However, Directors noted that the recent rise in political uncertainty poses risks to the outlook and the government’s reform agenda. They emphasized that continued sound policies and ambitious structural reforms are needed to support macroeconomic stability, secure confidence, and anchor strong and durable growth. Directors underscored that ensuring fiscal sustainability is a key priority. In this regard, they commended the authorities’ ambitious consolidation and reform efforts aimed at securing the sustainability of the public finances and social security. Directors welcomed the focus on controlling expenditure growth, including through the implementation of a cap on non interest federal expenditure. However, they highlighted that further efforts are needed to achieve fiscal targets. In light of the challenges facing the economy, Directors generally supported the current pace of fiscal adjustment, but emphasized that the fiscal effort will need to be more intense as the recovery takes hold. A rolling medium term fiscal framework would be helpful to clarify and update the government’s debt stabilization goals. Directors highlighted the need to reform the social security schemes, including those for civil servants at all levels of government, in view of unfavorable demographic trends and large actuarial imbalances. They also noted the importance of this reform for the federal spending cap over time. Directors expressed concern over subnational finances, and encouraged the authorities to continue developing durable solutions in coordination with the states. Directors agreed that monetary policy has been appropriately calibrated and recommended continuing monetary easing. Nevertheless, they encouraged continuous reassessment of the policy stance in view of the evolution of inflation and expectations and prospects for fiscal reforms. Directors welcomed the efforts to strengthen Brazil’s inflation targeting framework through improved communications and steps to alleviate distortions in credit markets. Directors underscored that the floating exchange rate system and reserve buffers are key sources of strength for Brazil and should be preserved. They commended the reduction in foreign exchange intervention and recommended that interventions be limited to addressing disorderly market conditions. Directors observed that the financial sector has remained sound despite the severe stresses. To make the system more robust, they encouraged actions to further strengthen financial safety nets through enhanced monitoring and an improved crisis management framework. Directors underscored the need for continued vigilance and close monitoring of the health of the corporate sector and its impact on the banking system. Directors stressed that ambitious structural reforms, including in the areas of tax policy, labor markets, and infrastructure are essential to raise long term growth. They also underscored the importance of trade reforms to enhance competitiveness and efficiency. Directors noted the ongoing efforts to combat corruption and stressed that continued strong action to improve governance, increase transparency and strengthen institutional frameworks will be key to securing strong, durable and inclusive growth.

1/ Includes the federal government, the central bank, and the social security system (INSS). Based on the 2017 draft budget, recent
announcements by the authorities, and staff projections.

2/ Currency issued plus required and free reserves on demand deposits held at the central bank.

3/ Base money plus demand, time and saving deposits.

4/ Q1 2017 only.

[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm .

If you know the other and know yourself, you need not fear the result of a hundred battles.

Sun Tzu

We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.